How much do I need to retire?

Brought to you by Telegraph Financial Solutions

Save

Save

3 January 2018 • 9:50am

Dreaming of a retirement filled with sun-soaked holidays, leisurely rounds of golf and that boat you’ve always coveted? You might want to reassess how much you’re saving into your pension if you want to make your vision a reality.

In the UK, automatic enrolment into workplace pension schemes has boosted the number of active savers, but many are still vastly underestimating how much they’ll need in retirement.

What annual income do I need in retirement?

Exactly how much you’ll need for a comfortable retirement will depend largely on your cost of living and lifestyle choices. If you want to enjoy regular holidays abroad or expensive hobbies, you’ll need to save more to boost your pension.

Retirees typically find they need less to live on in retirement because many have paid off mortgages, are no longer supporting a family and do not commute to work.

Experts typically suggest you’ll need between half and two-thirds of the salary you earned before retirement to maintain your lifestyle.

Industry estimates for a comfortable retirement commonly range between £23,000 and £27,000 a year. To benchmark pensions around the country, you can read our guide on the average pension pot amount in the UK for different age brackets.

Recent research by consumer group Which? found retired couples needed £18,000 a year on average to cover household essentials such as food, utilities, transport and housing costs.

Factor in holidays and other luxuries

This rose to £26,000 when allowing for extras such as European holidays and leisure activities.

If you want additional luxuries such as long-haul trips abroad and a new car every five years, you’ll need around £39,000 a year.

Which? said to generate an annual income of £26,000, a couple would need a defined contribution pot of £210,000 in today’s money alongside their state pension entitlement.

Given the average pension pot in the UK is £50,000, many still have a long way to go to secure a decent income in retirement. To benchmark pensions around the country, you can read our guide based on different age brackets.

How much do I need to save now?

The answer depends largely on your age, thanks to the power of compound interest.

Calculations by pension provider Scottish Widows show if you start saving into a pension at age 25, you will need to put aside £293 a month to secure an annual income of £23,000 in retirement. This is based on a salary of £30,000 a year, with employer contributions of 4 per cent, plus the state pension.

If you put off saving until you are 35, you will need to save £443 a month, while at 45 this figure jumps to £724.

If you’ve left retirement saving until you are 55, you will need to put away £1,445 a month to enjoy a £23,000 annual pension.

The calculations allow for inflation and assumes your contributions increase annually in line with your salary.

If you are self-employed and save into a private pension, your monthly savings requirement will be even higher because you will not benefit from employer contributions.

Am I on track for a comfortable retirement?

If you’re only saving the minimum required into your defined contribution workplace pension, chances are you’re not saving enough.

If you’re enrolled in a workplace pension, you must pay in at least 1 per cent of your wage and your employer must to the same, making a total contribution of 2 per cent.

From April next year, this will rise to 2 per cent for employees and 3 per cent for employers, before rising again in April 2019 to 3 per cent for employees and 5 per cent for employers.

The more you can put aside now, the faster your pension pot will grow, so consider increasing your savings above the minimum rate.

And don’t forget you may qualify for the state pension on top of your workplace or private pension. This will be a flat rate of around £160 a week, or £8,300 a year, from April next year. This will rise annually by the higher of inflation, earnings growth or 2.5 per cent.